It's the European economy, stupid: US recovery hangs on solving debt crisis

America's economic revival, and Obama's re-election, may depend on whether Europe can push through the political change needed for the European Central Bank to act

Ron Paul, one of the Republican presidential hopefuls, attacked the US Federal Reserve for 'bailing out profligate government spending [in Europe]'. Analysts pointed out that a break-up of the eurozone would be catastrophic for US banks. Photograph: Cliff Owen/AP

As the fragile US economy continues to rise slowly out of the abyss, Europe looks like its gravest threat. Apart from the occasional, and spectacularly unsuccessful, nudge from the sidelines the US has had to watch Europe's mounting debt crisis from afar and the sense of frustration is palpable.

"This is of huge importance to our own economy," Obama said last week after meeting Herman van Rompuy, European council president; José Manuel Barroso, European commission president, and others. "If Europe is contracting or if Europe is having difficulties, then it's much more difficult for us to create good jobs here at home."

Washington will again be closely watching this week's summit in Brussels. Treasury secretary Tim Geithner is so worried that he's flying to Europe. "US politicians probably haven't been this interested in Europe since world war two," jokes Nathan Gonzales, deputy editor of the Rothenberg Political Report, a Washington-based non-partisan political newsletter.

"The economy is the big issue for the 2012 election and Europe is going to be a big part of that," he said. But Obama has to play a careful game at home as well as abroad. Attempts to push the pace of change have been been sharply rebuffed in Europe, while at home anything smacking of aid for US rivals across the Atlantic will be used against Obama as he tries to encourage the US's own fragile recovery.

Last week would-be Republican presidential candidate Ron Paul railed against the Federal Reserve's role in the co-ordinated move by central banks to prevent credit markets freezing. "The Fed is behaving much as it did during the 2008 financial crisis, only this time instead of bailing out politically well connected, too-big-to-fail firms it is bailing out profligate government spending [in Europe]," Paul says.

In fact, analysts point out that part of the reason the Fed acted is that US banks and money market funds have lent heavily to European banks, and would be left painfully exposed in the event of by a eurozone default.

Nevertheless, Paul's attacks could damage Obama if Europe becomes an election issue, says Gonzales, but the real danger to his re-election prospects is the economy and if Europe's woes "feed into the sentiment that we are heading in the wrong direction".

The EU's's share of US exports has dropped from more than a quarter in 1999 to less than 18% today but it is still worth $400bn and in our ever more connected world a downturn in Europe would hit the rest of the world too, rebounding on the US.

US firms also have huge sums of money directly invested in Europe. No one really seems sure how the euro's collapse would hit the US financial sector. Fed chairman Ben Bernanke plays down that risk, but investors are spooked. Jacob Funk Kirkegaard, research fellow at the Peterson Institute for International Economics, said Washington was gravely concerned that the European Central Bank had so far failed to follow the lead of the Fed, which has acted decisively to prop up the US economy, buying $900bn worth of US treasury bonds in two rounds of "quantitative easing".

The frustration fails to take account of fundamental differences between the US and Europe, he says. The Fed has far broader powers and a clear mandate compared with the ECB. It is also clear, Kirkegaard says, that the ECB has its own agenda.

"In my opinion it's been deliberate. The ECB does not want to commit until the Europeans agree to tighter fiscal union. Market mayhem is an effective way of reaching political goals. If they'd done what the markets had wanted a month ago, Silvio Berlusconi would still be in power. Is that good for Italy or Europe?"

Radical action by the ECB cannot come fast enough for Jack Ablin, chief investment officer at Harris Private Bank. "The Europeans need to let the ECB buy them some time. Political solutions will not come quickly enough," he says. "If the ECB can act, that for me is the trump card, then we can start focusing on other things."